RAFIQUE A MALIK,MUMBAI vs. ADDL CIT 2(2), MUMBAI

Insofar as ground no.1 is concerned, brief facts are, assessee an individual, filed his return of income for the assessment year under consideration on 30th September 2008, declaring total income of ` 2,57,94,880. In the course of assessment proceedings, the Assessing Officer noticing that assessee has earned exempt income by way of dividend of ` 64,00,12,657, and long term capital gain from sale of equity and mutual funds amounting to ` 35,11,062, proposed to disallow expenditure relating to earning of such exempt income in terms of section 14A of the Income Tax Act, 1961 (for short "the Act") r/w rule 8D of the I.T. Rules 1962. Though, the assessee objected to such disallowance, the Assessing Officer rejecting the objection of the assessee disallowed an amount of ` 14,62,211 under section 14A r/w rule 8D. Of–course, by virtue of an order passed under section 154 of the Act on 20th July 2012, the disallowance was reduced to ` 12,81,536. Being aggrieved of such disallowance, assessee preferred appeal before the first appellate authority wherein the learned Commissioner (Appeals) sustained the disallowance.

Learned Authorised Representative submitted, during the relevant previous year, assessee had surplus funds available with him by way of own capital of ` 29,29,51,645 and had income of ` 16,82,08,460, as against the total investment of ` 20.41 crore. Learned Authorised Representative submitted, since the surplus funds available with the assessee is more than enough to take care of the investment, no disallowance on account of direct expenditure i.e., interest can be made. As far as indirect / administrative expenditure is concerned, the learned Authorised Representative referring to the income and expenditure statement as on 31st March 2008 submitted, the expenditure debited therein are in respect of specific head of income as shown in the computation and no expenditure was incurred for earning exempt income. He, therefore submitted, no disallowance under section 14A r/w rule 8D could have been made by the Assessing Officer. Learned Authorised Representative submitted, under similar facts and circumstances, the first appellate authority in assessee’s own case for assessment years 2009–10 and 2011–12 has deleted the addition made on account of disallowance under section 14A r/w rule 8D on the reasoning that assessee had not incurred any expenditure for earning exempt income. He submitted, against the order passed by the learned Commissioner (Appeals), the Department has not preferred any appeal before the Tribunal.

Learned Departmental Representative on the other hand strongly supporting the impugned order of the learned Commissioner (Appeals) submitted, during the year under consideration, investment of the assessee has substantially increased. He submitted, as the assessee has earned exempt income on such investment disallowance under section 14A r/w rule 8D has to be made.

We have considered the submissions of the parties and perused the material available on record. The contention of the assessee challenging the disallowance of expenditure under section 14A r/w rule 8D is two fold. Firstly, enough surplus fund was available with the assessee to make the investment, hence, no disallowance out of interest expenditure could be made. Secondly, it is contended, whatever expenditure is claimed by the assessee is relatable to specific item of income earned by the assessee and no expenditure is relatable to earning of exempt income. As far as disallowance of interest expenditure is concerned, it is observed from the Balance Sheet of the assessee as at 31st March 2008, the assessee had an amount of ` 29,29,51,645 in its capital account. Further, the assessee has disclosed income of ` 16,82,08,460, in the impugned assessment year. Therefore, it is evident, assessee had sufficient interest free funds available with him to take care of the investment giving rise to 5 Shri Rafique A. Malik exempt income. Thus, in terms with the ratio laid down by the Hon'ble Jurisdictional High Court in CIT v/s Reliance Utilities and Power Ltd. [2009] 331 ITR 340 (Bom.) and CIT v/s HDFC Bank Ltd. [2014] 366 ITR 505 (Bom.), no disallowance out of interest expenditure should be made. As far as indirect / administrative expenditure is concerned, it is observed from the income and expenditure account as on 31st March 2008, the expenditure claimed by the assessee are against specific head of income shown in the statement of computation of total income. Bank charges of ` 18237=92 and salary expenditure of ` 4.50 lakh was in respect of the business income earned from proprietary business Metro Shoes. Maintenance charges of ` 4,278 and property tax of ` 33,954, are related to house property income. The expenditure incurred towards brokerage and insurance premium has not been claimed by the assessee. In these circumstances, no other expenditure remains which can be apportioned to the exempt income. On a reading of section 14A of the Act, it is evident, only expenditure incurred for earning of exempt income can be disallowed. If the assessee proves on record that he has not incurred any expenditure for earning exempt income, no disallowance under section 14A can be made. In fact, accepting the aforesaid factual as well as legal position, the learned Commissioner (Appeals) in assessment years 2009–10 and 2011–12 has deleted the disallowance made by the Assessing Officer

In ground no.2 the assessee has challenged levy of interest under section 234B of the Act.

Both the parties admitted before us that this ground is consequential in nature. Accordingly, we direct the Assessing Officer to give consequential effect while re–computing the income of the assessee keeping in view our findings given above and in accordance with the provisions of law.

In the result, assessee’s appeal is partly allowed. Order pronounced in the open Court on 22.04.2016